Which to pay off

haras_nosirrah

Hi Everyone

Have been overpaying my mortgage since I got my first house in 2007. I bought a 3 bed house, rented two rooms out and paid the income they gave me off the mortgage. Cleared 20k in 3 years :j This was when I was young, free and single. Wouldn't get a lodger now in my current life.

Fast forward to now. Am now married as of May and starting to plan ahead. I bought a house with my then partner but now husband in feb 2010 and have kept a hold of the previous house and rent it out. I get around £250 above my costs but keep that back for maintenance. The mortgage is a btl mortgage over 25 years on repayment.
I have been overpaying the mortgage since we moved here and have managed to get our residential mortgage down from 120k in feb 2010 to 106k now. We have also paid for a wedding, new bathroom and new windows.

Current figures are as thus

Original residential mortgage secured on residential house - £79,000 over 22 years - 3.03% (1.03% above base tracker but Nationwide have a 2% floor. 1.03% above base for the term of the mortgage)

Top up from move secured on residential house - £27,000 over 7 years. 4.28% fixed (due to go onto 3.99% variable in feb)

BTL mortgage on house rented out - £106,000 over 25 years at 6.29% fixed (was fixed for 5 years so will be 3.5 years left on fix)


Up to now I have been overpaying the 4.28% fixed rate by £500 a month. The reason for this is as it is higher in rate than the tracker (and being a tracker for the term of the mortgage it is a good deal)

I have been playing with the snowball calculator and am wondering if I should be paying off the btl mortgage instead as the rate is much higher. The reason I have left it is because of the tax relief (and I am almost a higher rate tax payer and may well become one this year as my job is quite heavily commission based) however does the tax relief overcome the huge interest rate difference?

Also now that we are no longer saving for the wedding, bathroom etc I will have some more spare funds. I am tied into the no more than £500 off the top up product until feb. Would I be better paying the £20 to reduce the term on this so I can pay off more in the meantime or better putting it into a savings account (3.3%) until feb and paying a lump sum off?

So many questions. Any answers?

dimbo61

You dont give the LTV of either the BTL property or your home!
But as you point out you get tax relief on the interest you pay on the BTL plus its fixed for another 3.5 years! so by then the LTV should be even better as A: you will have paid off more of the loan ( repayment) and B: increase in value
So I would overpay on the most expensive part of your home mortgage and if you can afford say £1000 a month then paying £20 to change the term its well worth it
Only my views and well done so far

haras_nosirrah

Good point re ltv's

home 106k on a value of 180k
btl 106k on a value of 150k.

The only thing that makes me think I should overpay the btl is that the rate at 6.29% is so much higher than the other two so does that make it more sense to go for that depite the tax relief? I pay £6667 anual interest on btl vs £3548 on the home mortgage.

Difficult this.

dimbo61

Yes but the BTL is now an investment/buisness where as your home is just that YOUR HOME
If you needed too you could always put the BTL on the market and sell but you need somewhere to live.
You have a good LTV on both properties but for me I want my home mortgage free asap and dont care if the BTL has a loan/mortgage on it until I am long retired.
Getting rid of both mortgages is the long term aim is it not

haras_nosirrah

Very true. It is financial security that I am aiming for. Good to know I am doing the right thing. The btl was my home before I met my husband. I kept it so that if things went wrong I would have somewhere to go - he asked me to marry him 3 months later. If I'd known that I would have sold it lol. The other reason I am paying off so much now is we want to start trying for a family next year and as the main earner it is going to hit us hard when i am on maternity leave as I earn twice what my husband does. I would like to clear the 27k before having a baby so our mortgage would drop to 400 a month when I am off. that is the plan anyway but things never usually go to plan do they

getmore4less

Don't forget you can claim tax relief on lending upto the value when first let with a bit of carefull finance planning

What's the follow on for the BTL?

At 40% tax you are net around 3.78% on the 6.29% so it will become close against the 3.99% on the residential.


Unless this move into 40% tax is a long term definate then sticking with the 3.99% residential and a few pension contributions to keep out of 40% should do for the short term.

haras_nosirrah

Hi

Does that mean I can claim for £34k of my resi mortgage as well? Just want to check if that is right?

Re the 40% it will depend on whether I go back to work full or part time after kids. If I go back full time then I will prob stay 40%, if not then I won't.

Follow on for btl is 2.99% from memory - is a bank of Ireland product.

I pay 5% of my salary into a pension at the moment. Am 28 years old.

Thanks for the help

getmore4less

Follow on for btl is 2.99% from memory - is a bank of Ireland product

So early savings folllowed by less efficient
needs a few longer term calculations

If you structure the business properly you should be able to include borrowings upto full value at first letting.


There are some examples on HMRC site but I can't find them again.

dimbo61

Dont worry about the Overpaying so much you could do with a big savings balance for next 2/3 years upto £16K in cash ISA,s to help while you are off work and if you then go back part time